A “climate investment trap” laid down by purveyors of sustainable finance is making it tougher for developing countries to reduce their greenhouse gas emissions by driving up the cost of the money they have to borrow to get the work done, a research team at University College London has found.
The paper shows that “Africa and other developing regions tend to pay a much higher cost of financing for green energy relative to fossil fuels,” Bloomberg Green reports. “Countries that must pay a higher price to green their economies might forego such investments, even if they’re the ones that will suffer the most as the planet warms.”
And yet, “while many of the world’s poorest countries struggle with the economic devastation from COVID-19 and limited access to vaccines, some of the biggest asset managers and their clients continue to earn high returns on emerging market bonds,” the news agency adds, citing investment giant BlackRock as one of the main holders of emerging market debt. “Those profits are partly why it’s so hard for developing nations to make fast progress on cutting emissions.”
The study’s lead author, Nadia Ameli, said the situation calls for “radical changes”, noting that even in relatively progressive jurisdictions like the European Union, sustainable finance initiatives rarely deal with the mechanics of getting capital into the hands of poorer nations.
“The pandemic has made the problem more urgent as the high cost of borrowing for developing nations coincides with a plunge in state revenues,” Bloomberg writes. “The great irony is that the investment world is bursting with ESG and climate-oriented products and services hunting for assets.” The funds on offer so far exceed the opportunities available that ESG managers are pouring their dollars into tech stocks, rather than energy transition or climate adaptation investments.
While “a planetary problem surely requires a portfolio to match,” Bloomberg adds, “developing countries are considered a risky bet by Western investors,” and Ameli said the rise of climate risk analysis may be making a major problem even worse. “The fact that developing countries will be hit the hardest by global warming may mean investors actually penalize them the most.”
Bloomberg has more on the story here.